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How to Understand Your Credit Score by Ozeme J. Bonnette Since the financial industry meltdown, the ability to borrow money has become extremely difficult. The days of obtaining loans without proof of income are gone. In fact, retirees often find it challenging to refinance a mortgage based solely on their retirement income. Solid credit scores are very important when trying to obtain a loan. A better credit score will not only improve the chances of obtaining a loan, but also allow for better interest rates on the funds borrowed. Today, we will look briefly at some of the most important aspects that are considered when determining our credit score. Payment history Being on time is a critical component in maintaining a good credit score. Lenders wneed to know that their borrowers will be reliable and punctual. While one late payment won't harm a credit report terribly, a pattern of tardiness most definitely will. Life happens. We should never let one late payment discourage us. Over time, the score will come back up as long as payments are regularly on time. Total debt owed A high percentage of debt will cause a lender to shy away from a potential borrower. If a borrower tends to use the majority of his or her available credit, they appear to be spending much more than their current income can afford. That is not a good sign. It is best to keep the usage of all credit accounts at or below 40%. If the usage amount is higher, we should work on paying them down as quickly as is possible. Length of history The longer the time since a borrower first established credit, the better. A long credit history gives a creditor a better idea of a borrower's ability to pay. Even if we don't use our older credit accounts often, it is a good idea to keep them open and to use them to reflect some activity on the accounts. New accounts Opening new credit accounts can hurt a credit score. A creditor does not want to feel that they have to compete with too many other creditors for a borrower's discretionary dollars. We should avoid opening too many new accounts. Also, we should be careful about closing too many of the accounts that we currently have open. Closing accounts can affect the credit score as well. Types of accounts There are two main types of accounts - installment accounts and revolving accounts. Installment accounts are loans that last for a fixed amount of time, such as a mortgage or a car loan. Once principal is paid, it cannot be re-borrowed. The account will be closed when the balance is paid off. Revolving accounts are loans that don't have a specific expiration date, such as a credit card. The amount borrowed can be continuously paid off and re-borrowed. The account is not automatically closed when there is no balance due. Monitoring our credit reports It is important to check our credit reports on a regular basis. Once a year should help ensure that nothing unusual is happening with the accounts. It encourages us to observe our spending habits and identify ways to improve our credit and our score. Ozeme J. Bonnette is a financial coach, speaker, and author. She began her career at Merrill Lynch, and now works to increase financial literacy. She teaches and speaks to groups and organizations throughout the U.S. She earned 3 Bachelor's degrees at Fresno State and an MBA at UCLA's Anderson School. She blogs at http://www.povertynorriches.com. Send questions and comments to ozeme@thechristianmoneycoach.com.

 

 

 

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